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Social Media Opens Up New Issues for Investors

By Andrew Marder - Apr 24, 2013 at 11:05AM

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Yesterday's sudden market crash highlights the problem of too many cooks in the kitchen.

Yesterday, the Dow Jones dropped 143 points after the Associated Press Twitter account posted a tweet saying that the White House had been bombed and the president injured. Everything in D.C. was actually fine, but there was something amiss on Twitter. The AP's account had been hacked, allegedly by a Syrian group which quickly took responsibility. 

The talking heads will no doubt take this as an opportunity to say, "Told you so," to supports of social media, but the issue wasn't with the media, it was with the lack of security at the AP. As anyone can tell you, a security system is only as strong as its weakest component. The rise of social media merely means that there are more components in play, not that they are inherently weaker.

The changing ways of social media
A CNN article published after the hack laid the blame squarely with Twitter, but that's not fair. Blaming Twitter is like blaming a locksmith for your home getting robbed even though you left the door open. Twitter has provided the tools for security, but those tools have to be correctly implemented.

Apart from the huge fall, the main reason we're even discussing this is because companies are starting to use social media sites like Facebook (FB -5.12%) and Twitter to make real announcements. Last year the practice got attention when Netflix (NFLX -7.02%) CEO Reed Hastings posted on his Facebook page that Netflix had just cleared 1 billion hours of steamed content in a month. The SEC moved in to warn Hastings, saying that Facebook wasn't a public enough place to make those sorts of announcements.

Fast-forward to 2013 and the SEC announced that social media might be all right after all. Earlier this year, it said that using social media was OK as long as companies disclosed their plans ahead of time -- which just means that you need to tell me to watch the Facebook page if you want to make meaningful announcements on Facebook.

The reason to use social media
The main reason the AP hack was so damaging is that people use Twitter. As Kavitha Venkita from the CEB consultancy said, "The SEC looked at it purely from the perspective of disclosure equality, but not from the information risk standpoint." The SEC wants as many people to have fair access to corporate news as possible, and since people are on social media, companies should be able to disclose information there.

The failing of the AP shouldn't turn investors off Twitter. Over the past few years, many corporations have come to rely on Twitter to gauge public sentiment, and it works the other way, too -- informing the public about a company's own feelings toward companies. That's a useful tool to have, especially if you hold companies that depend on strong branding.

For now, take the AP hack as a good reason to think about your own security, and what you can do to enhance it. Hopefully, Twitter will soon add two-factor authentication to its site, giving users another security tool, but for now, a good password and common sense is all that we've got. If yesterday's mishap taught us anything, it was to double-check our news.

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